Can you go from an LLC Partnership back to a sole owner LLC

[Steve Podwojski]

I have owned a LLC partnership for 6 years in Maryland that owns rental properties and filed tax returns. If I convert it back to a sole owner pass-through LLC will it spark an audit?

Also, can I set it up so that my S-corp LLC owns the above sole owner LLC. This way I only have to file one tax return and have to W2 myself through one company?

[Logan Allec]

@Steve Podwojski Going from a multi-member LLC to a single-member LLC does not spark an audit in and of itself as long as you treat it for tax purposes within the framework of Revenue Ruling 99-6, which is the IRS' guidance for this very situation.

Are you buying out the other members for cash? If so, then from your perspective the transaction is treated as though the LLC distributed all of its assets to the members (including you) in liquidation according to the distribution provisions of the operating agreement, and then you purchased from the other members the assets that would have deemed to have been liquidated to them in this hypothetical liquidation scenario.

Of course there are some complexities here (are there any built-in gains? what are you going to do with the assets?), but no, as long as you play by the rules, it will not "spark an audit."

As for your second question, can your LLC taxed as an S corporation own your other LLC? Sure. But I'm not sure what it would accomplish and this could in fact lead to a tax trap later on. Your "other LLC" would not have to file its own tax return either way (whether owned directly by you or through your S corp) because it's disregarded, assuming that this Maryland LLC only invests in Maryland real estate.